The beauty of Birchbox: it's not subscription commerce, it's marketing that women actually pay for

Birchbox is one of those startups that's hot with the New York tech cognoscenti but not everyone, here or in the Valley, understands exactly why. It tends to get lumped in with subscription commerce sites, but that's not right — what it's building is much more impressive.

I only realized that this summer, when I decided to actually shop at many of the commerce startups I write about. With Birchbox, though, I'm decidedly not its target demographic (or so I thought). It's targeted to those who "enjoy using the best products" but who "don’t want to have to work too hard to find them" and promises to "sort through the clutter to send you what works." Well that's a stretch, I thought.

I'm firmly anti-subscription commerce (it's a fad!), and not a beauty products person. Sephora stresses me out and I buy shampoo and soap at the drug store. But my first box from the company, featuring $10 worth of beauty samples like Kerastase shampoo, Stila Staniac lipgloss, NUXE Huile Prodigieuse Dry Oil and Comodynes Self-Tanning towelettes was so awesome I ended up buying full-sized versions of several of them. And I did so the following month, and the month after that. Birchbox has turned a beauty simpleton like myself into one of those people that spends $50 on a bottle of shampoo.

The company created a loyal beauty products customer out of thin air, and perhaps the worst part is I don't even regret it. It happened so naturally. It's demand-generation marketing, and it might be the strongest kind there is, because —ugh — we are paying for it.

Co-founder Katia Beauchamp calls it discovery commerce. "It's a new term we coined because there isn't a proper category that describes what we do," she says. It isn't subscription commerce because it doesn't live and die by the box. It isn't media because it makes money through the old fashioned selling of actual goods. It is really good marketing with a seamless transition to buy. And bonus — it's got all the analytics to prove it and can provide increasingly strong targeting for the brands it sells.

If you think about it, Birchbox has figured out a way to get women to pay money to be marketed to. The last time that happened: glossy women's magazines, but this is a smarter, interactive version of that. The boxes cost twice the price of a newsstand magazine and you get five or six samples. They're often themed (travel, summertime, partnerships with Gossip Girl, Gwenneth Paltrow's Goop, or Glamour magazine). The boxes contain editorialized descriptions of the products that direct users to check out how-to videos on Birchbox.com. Friendly email reminders drive traffic to the site's editorial content as well. Beauty obsessed subscribers tape themselves "unboxing" their package each month.

That doesn't happen with a magazine. I have yet to feel silly looking at the $10 charge for a box of samples in my bank account, because each month there's usually something inside the box worth around ten bucks. A set of neon earbuds. A month's supply of a face cream that costs $120 full size. Twenty five bucks off a $75 purchase at Madewell. A few boxes haven't delivered anything I really loved, but even then I hardly cared because I still got $10 worth of entertainment opening the box and examining its contents. For that, Birchbox has its editorial team, led by former Conde Nast Traveler beauty editor Mollie Chen, to thank.

So we pay, happily, to get boxes full of samples — all of which Birchbox sources for free. Brands are happy to give the company samples of their product at no cost, and in return get a chance at converting approximately 200,000 new customers. (The company has not confirmed that subscriber figure -- the last they've made public was 100,000 in January -- but I've heard it from people familiar with the company.) It's worked: Half of Birchbox subscribers have converted into customers of its e-commerce site, Beauchamp says.

To show its partner brands how serious the company is about converting subscribers into customers, Birchbox actually buys inventory wholesale and operates its own shipping department. The company started out two years ago working eight brands. Now it's got more than 400 on board.

The mix of revenue between subscriptions and e-commerce sales varies month-to-month, Beauchamp says: "The two things are so important to each other. It's important that we are seen as a retailer, but also show we can inspire demand."

This is big for the beauty industry because, up until now, it hadn't really figured out e-commerce. As a category, beauty has struggled to bring consumers online since most women want to see, smell and try the products they're buying, and they rarely make returns, Beauchamp says.Online shopping was limited to researching and replenishing products they'd previously purchased, not trying new things. Beyond that, the beauty industry is fragmented and overwhelming to navigate: each category contains thousands of brands and the largest company (Procter & Gamble) owns a mere 12.7 percent of the market.

So brands spend obscene amounts on marketing to stand out: L'Oreal, which takes around 10 percent of the market, spends $2.1 billion a year. Estee Lauder, owning around 4 percent of the market, spends $80 million. Birchbox is encouraging women to try products, and closing the loop when they decide to buy them on their site.

Brands including Color Club, a legacy nail polish brand, and Benta Berry, a skincare brand, have used Birchbox to introduce themselves to new customers: 94 percent of Birchbox subscribers were new to Color Club and 98 percent were new to Benta Berry. Now Birchbox is the number one retailer for Benta Berry in the US and among the top retailers of Color Club nail polish.

Birchbox's shopping habit data is also good for personalization, which Birchbox takes advantage of. The company sends out 30 to 50 different versions of its boxes each month based on a short survey users fill out on their hair and skin type, as well as what they're most likely to splurge on. That targeting will continue to improve based on insights gleaned from shopping and browsing habits.

This is why I'm so sold on this business. It embodies several of my pet topics: curation, content and commerce, marketing, New York startups, subscription commerce, all in an industry that hasn't caught up to the Web. The company wouldn't comment on revenue, but I can offer some back-of-the-envelope math:With approximately 200,000 subscribers, the company could make around $24 million a year from subscriptions alone, (not accounting for churn). On top of that, consider revenue from half of those subscribers buying full-sized items.

Investors I spoke with believe the company's direct commerce business will account for a much larger portion of revenue as the company matures. That's why Accel Partners, Harrison Metal Capital, Consigliere Brand Capital, First Round Capital, Forerunner Ventures, Lerer Ventures (a PandoDaily investor), Sam Lessin, Dave Morin and Gary Vaynerchuck plunked $11 million into the company.

The problem is, like many smart new business models, it's not difficult to clone. There are already plenty of Birchbox copycats. On the West Coast, MyGlam, started by YouTube beauty personality Michelle Phan, recently hired former Bare Escentuals exec Jennifer Goldfarb and raised $2.75 million for the exact same idea. It's gained enough traction that beauty bloggers often post Birchbox Vs. Glam Bag unboxing videos. In Europe, they're just as common: the always-reliable Samwer brothers are there with GlossyBox, and Glamabox in Asia. (Someone even commissioned a Birchbox clone site on DoNanza for $10,000.)

Last month, Birchbox responded to international clone competition in the same way Fab.com, Groupon, 99Designs and Airbnb have: it bought one. The company acquired JolieBox, a similar business based in Paris, in August. Birchbox had considered expanding internationally on its own, but met the JolieBox team and decided it would be faster and more efficient to do so by acquisition, Beauchamp says.

Beyond cloning, there are issues of commitment. People aren't likely to shop on Birchbox.com without subscribing first, so the company's clout with brands and ability to sell depends on its ability to convince women to pay $120 for 12 beauty surprises a year. Once they do, they're likely to become hooked.

The company hopes to expand its style of "discovery commerce" beyond the beauty category into other areas. This is why Beauchamp and co-founder Hayley Barna didn't give the company a name with the word "glam" or something equally as girly in it. Last year Birchbox Man launched, selling $20 monthly boxes of "sample" items that Birchbox did not necessarily get for free. There are zany socks (startup dudes love those, right?), tech accessories, and other "entry level" products that introduce subscribers to a brand like Quirky, the crowdsourced design company. These are categories that already do have shoppers online, so the demand for discovery might be a little lower.

Birchbox will experiment with more categories targeted at women, too. Judging by a survey it recently sent around to users, the company is exploring project-based boxes like craft projects, cooking projects or party themes, as well as home decor and work supplies. I'm not convinced these categories will translate well to Birchbox's dual revenue stream marketing-we-pay-for engine.

Then again, until Birchbox, I wasn't a beauty believer, either. So maybe it's time for me to buy a designer spatula or garlic press.